Content Includes: Preqin Special Report: Impact of Brexit on Hedge Funds Investors and Managers Respond: Year-End 2016 Update Performance December 2016 Managers report that Brexit has had a significant impact on the performance of hedge funds in 2016. Location of Firms UK-headquartered hedge fund managers look set to stay in the UK. Institutional Investors Institutional sentiment towards investment in the UK improves five months after Brexit decision. Outlook While uncertainty remains, fund managers are increasingly optimistic. alternative assets. intelligent data.
Preqin Special Report: Impact of Brexit on Hedge Funds Download the data pack: Foreword 2016 has been a challenging year for hedge fund managers: investor concerns surrounding the performance of the asset class have led to many diffi culties in both retaining capital and raising fresh assets. Despite signs of improvement in performance in recent quarters, the industry has not done enough to stem outfl ows of assets from the industry: almost $70bn in capital has exited hedge funds over the fi rst nine months of the year. Compounding outfl ows and performance concerns, a number of macroeconomic events have made for a challenging environment in which to generate alpha for investors. Among these events was the referendum on the UK s membership of the EU, held on 23 June 2016, which saw a largely unexpected majority vote in favour of leaving the Union, resulting in volatility and uncertainty both politically and in global fi nancial markets. Five months on and uncertainty still prevails regarding the timing and terms of the UK s secession from the EU. However, with nearly half a year to refl ect on how the hedge fund industry could adapt to the changing landscape, Preqin surveyed 276 hedge fund managers and 108 hedge fund investors, as well as utilized data from Preqin s Hedge Fund Online, to analyze the changing sentiment of the hedge fund industry surrounding the Brexit vote and how the performance of hedge funds has been affected by this event. We hope you fi nd this report useful, and welcome any feedback you may have. For more information about Preqin and our Hedge Fund Online database, please visit www.preqin.com or contact info@preqin.com. Key Facts Size of the Hedge Fund Industry (As of 30 September 2016) 590 of the 944 EU-based hedge fund managers are UK based. UK $478bn EU* $125bn 408 of the 757 EU-based institutional investors in hedge funds are UK headquartered. *Excluding UK. Pre-Vote: Hedge Fund Manager Views on Whether Britain Will Vote to Leave or Remain in the EU Referendum Result: 11% Leave 18% Unsure 71% Remain 52% Leave 48% Remain All rights reserved. The entire contents of Preqin Special Report: Impact of Brexit on Hedge Funds, December 2016 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Special Report: Impact of Brexit on Hedge Funds, December 2016 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent fi nancial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Special Report: Impact of Brexit on Hedge Funds, December 2016. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confi rm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Special Report: Impact of Brexit on Hedge Funds, December 2016 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Special Report: Impact of Brexit on Hedge Funds, December 2016 or for any expense or other loss alleged to have arisen in any way with a reader s use of this publication. 2 2016 Preqin Ltd. / www.preqin.com
Download the data pack: Preqin Special Report: Impact of Brexit on Hedge Funds The Impact of Brexit on Hedge Funds: Year-End 2016 Update UK- and EU- Focused Hedge Funds Suffer in Immediate Aftermath of Brexit, but Both Show Rapid Recovery The latest performance data taken from the 1,922 UK- and Europe-focused hedge funds profi led on Preqin s Hedge Fund Online illustrates the effect of the Brexit vote on both markets over the course of 2016. Both benchmarks have been broadly in line with each other since the beginning of the year (Fig. 1). Prior to the referendum, both sets of funds recouped early 2016 losses, with the UK industry reaching positive returns for 2016 in April at 1.12%; however, Europe-focused funds were still in negative territory (-1.71%). The immediate aftermath of the EU referendum had a negative impact on both UK- and Europe-focused funds, with UK-focused vehicles losing the most. However, both UK- and Europefocused funds have managed to capture the upside of the volatility created in European markets post Brexit, and despite a small loss in September for UK-focused funds, both benchmarks are in positive territory. Managers Report Brexit Has Had Significant Impact on Performance of Hedge Funds in 2016 In a June survey of 270 fund managers conducted prior to the EU referendum just 26% of fund managers noted an impact of the forthcoming poll on the performance of their hedge funds at that time, with nearly two-thirds of these managers stating any impact was negative (Fig. 2). In the immediate aftermath of the Brexit decision, the effects were widely felt across the hedge fund management industry: 61% of fund managers reported to Preqin in July that the EU referendum had impacted their fund s performance. More than half (55%) of these fund managers reported this impact was negative, in line with the data Fig. 1: Cumulative Performance of UK- and Europe-Focused Hedge Funds in 2016 (As at November 2016) Cumulative Net Return 4% 3% 2% 1% -1% -2% -3% -4% in Fig. 1, which shows the sharp fall in the performance of UK- and EU-focused funds in June 2016. However, despite managers in the weeks after the Brexit decision facing performance diffi culties as a direct result, hedge funds at this time were also largely positive about the effect of the referendum on their portfolio for the year ahead: 31% predicted that Brexit 1.91% 0.99% Jan Feb Mar Apr May Jun Jul Aug Sep Oct UK-Focused Hedge Funds Europe-Focused Hedge Funds Fig. 2: Hedge Fund Manager Views on the Impact of Brexit on Their Performance 6 5 4 3 2 1 9% 17% Impact over H1 2016 27% 34% Impact Directly after Vote 32% 21% Impact over H2 2016 Source: Hedge Fund Online Positive Impact Negative Impact Source: Hedge Fund Manager Surveys, June, July & November 2016 would positively impact their portfolio in the forthcoming 12 months compared with 13% that believed the effect would be negative (Fig. 3). Five months on, and the effects of Brexit continue to be felt among the majority of hedge fund managers: 53% of managers surveyed reported to Preqin in November 2016 that the outcome of the EU referendum had impacted the 2016 Preqin Ltd. / www.preqin.com 3
Preqin Special Report: Impact of Brexit on Hedge Funds Download the data pack: performance of their funds in H2 2016 (Fig. 2). However, those fund managers that believed that Brexit would have a positive impact on their portfolios were proved correct hedge funds were able to rapidly bounce back from the post-referendum market volatility. Sixty percent of the hedge fund managers whose performance had been impacted by Brexit reported that in H2 this impact was positive (Fig. 2). When looking forward at the effect of Brexit on hedge funds in 2017 and beyond, there are signifi cant levels of uncertainty: a third of fund managers reported that they are uncertain as to the impact of the referendum on their portfolios in the next 12 months, and a greater proportion (36%) are uncertain regarding the longer term impact (Fig. 3). However, any effects felt by the hedge fund community are mostly predicted to be positive: a quarter of hedge fund managers surveyed in November 2016 believe Brexit will have a positive impact on their portfolio in the next 12 months and in the longer term, in comparison to 7% and 5% respectively that predict the effect will be negative. UK-Headquartered Hedge Fund Managers Look Set to Stay in the UK Our survey of fund managers after the vote in July indicated that it was unlikely there would be a mass exodus of UK-based hedge fund managers immediately following the Brexit result: 8 of UK-based managers did not anticipate changing their location (Fig. 4). Fast-forward fi ve months, and with the implications of Brexit still very uncertain, a greater proportion of surveyed managers in November are uncertain of their position (24% vs. 17% in July 2016), or are considering moving operations away from the UK (6% vs. 3% in July 2017). However, notably, no hedge fund managers surveyed directly after the vote or in November stated defi nitively that they would move their business out of the UK. Investor Sentiment towards UK Improves Five Months after Vote Preqin also surveyed 50 institutional hedge fund investors globally in July, and a further 108 investors in November Fig. 3: Hedge Fund Manager Views on the Future Impact of Brexit on Their Portfolios 10 9 8 6 5 4 3 2 1 28% 13% 28% 31% 2016, to discover the potential impact of the UK s decision to exit the EU on their portfolios, and to see if there have been any changes as year progressed. In July s survey, the majority of investors thought there would be no change to their UK hedge fund investments as a direct result of Brexit over both the next 12 months and the longer term (Fig. 5). Five months later and this looks largely to still be the case. Although a greater proportion (21%) of investors indicated to Preqin in November that they plan to invest less in the UK in the next 12 months than those that plan to invest more (13%), the proportion of investors looking to take capital out of UK hedge fund investments has decreased and 33% 37% 36% 7% 5% 35% 4 35% 25% 23% 24% Jul-16 Nov-16 Jul-16 Nov-16 Next 12 Months Longer Term Uncertain Negative Impact No Impact Positive Impact Fig. 4: UK-Based Hedge Fund Manager Views on Whether Brexit Will Lead to a Change in Location of Their Business Operations 10 9 8 6 5 4 3 2 1 17% 3% 8 Jul-16 24% 6% Nov-16 Uncertain Considering Moving Operations outside the UK Do Not Anticipate Changing Location Will Change Location to outside the UK/EU Will Change Location to Elsewhere in the EU those looking to increase their UK investments has grown since our July 2016 survey. A similar trend was reported over the longer term, suggesting the concerns of some investors immediately after the EU referendum have been assuaged in the intervening fi ve months, even though there remains a relatively signifi cant proportion of investors about one-fi fth that may reduce their exposure to UK hedge funds as a direct result of Brexit. In contrast to the UK, investor sentiment towards the rest of the EU has become more bearish since our survey in June. While the majority of respondents to both surveys stated there would be no 4 2016 Preqin Ltd. / www.preqin.com
Download the data pack: Preqin Special Report: Impact of Brexit on Hedge Funds change to their activity, when asked what their plans were for the year ahead, only 4% of surveyed investors in November stated they will invest more in the EU, compared with 12% directly after the vote (Fig. 6). Over the longer term, a smaller proportion (4%) of respondents in November plan to invest more in the rest of the EU than when surveyed in June (9%), and a larger proportion will actively look to invest less (15% vs. 12%). Outlook The UK Government is yet to trigger Article 50, which would formally notify its intention to withdraw from the EU. Given no state has ever left the EU before, the political and economic consequences of the Brexit decision, both locally and globally, are still far from clear. The results of a series of surveys conducted by Preqin throughout 2016 reveal that uncertainty about the full ramifi cations of this unprecedented decision also pervades. In the immediate aftermath of the referendum, funds focused on the UK and EU suffered performance diffi culties as a result of a decision that shocked many, including the 71% of hedge funds that reported to Preqin in June that they expected UK voters to choose to stay as part of the EU. However, as the year progressed, many fund managers globally, as well as in the UK and EU, found that although Brexit was impacting their portfolios, this effect was positive, as they were able to generate strong returns on the back of the resulting volatility within the market. Looking ahead to 2017 and beyond, although a large proportion of fund managers are unsure of the impact of Brexit on their portfolios, most believe any impact would be positive rather than negative. There has been growing uncertainty among UK hedge funds throughout 2016 regarding where they choose to be located as a result of the EU referendum. Although the largest proportion of UKbased fund managers surveyed have no plans to leave its shores in the immediate future, many will be paying close attention to the negotiations between UK and the EU nations if and when Article 50 is triggered. Fig. 5: Investor Views on the Impact of Brexit on Their Hedge Fund Investments in the UK 10 9 8 6 5 4 3 2 1 7% 62% 31% 13% 66% 69% 21% 24% 7% 7% 75% 18% Jul-16 Nov-16 Jul-16 Nov-16 Next 12 Months Longer Term Will Invest More in the UK No Change Will Invest Less in the UK Fig. 6: Investor Views on the Impact of Brexit on Their Hedge Fund Investments in the Rest of the EU 10 9 8 6 5 4 3 2 1 12% 71% 4% 79% 18% 17% 9% 79% 4% 81% 12% 15% Jul-16 Nov-16 Jul-16 Nov-16 Next 12 Months Longer Term Will Invest More in Rest of the EU No Change Will Invest Less in Rest of the EU Preqin Hedge Fund Online: The Leading Source of Intelligence on the Hedge Fund Industry Hedge Fund Online is Preqin s award-winning hedge fund information resource, incorporating all of our hedge fund data, intelligence and functionality, providing you with the most comprehensive coverage of the asset class available. Hedge Fund Online is updated on a daily basis by teams of skilled research analysts based around the globe, making it a vital source of data and information for fund managers, investors, service providers and other professionals seeking to keep up-to-date with the latest developments in the industry. Arrange a demo to explore Hedge Fund Online: www.preqin.com/demo 2016 Preqin Ltd. / www.preqin.com 5
Preqin Special Report: Impact of Brexit on Hedge Funds December 2016 Preqin: Global Data and Intelligence If you want any further information, or would like a demo of our products, please contact us: With global coverage and detailed information on all aspects of the hedge fund asset class, Preqin s industry-leading Hedge Fund Online service keeps you up-to-date on all the latest developments across the hedge fund universe. Source new investors for funds Find the most relevant investors, with access to detailed profi les for over 5,000 institutional investors actively investing in hedge funds, including insurance companies, pension funds, family offi ces, foundations, wealth managers, endowment plans, banks, fund of hedge funds managers and more. Identify potential investment opportunities View in-depth profi les for hedge funds seeking capital, including information on investment strategy, geographic focus, structure, service providers used, sample investors, direct contact information and more. Find active fund managers of hedge funds Search for fi rms operating hedge funds. View information on key contacts, assets under management, performance history, key investment preferences, known investors and more. Benchmark performance Identify which fund managers have the best track records with fully customizable performance benchmarks, and view performance details on individual named funds and share classes. Examine fund terms and conditions Access fund-by-fund and industry level fund terms and conditions data for individual hedge funds, which provide a market overview, enabling you to see the current trends for specifi c strategies, structures, sizes and more. View detailed profiles of service providers Search for active administrators, custodians, prime brokers, auditors and law fi rms by type and location of funds and managers serviced. Customize league tables of service providers by type, location of headquarters, and total known number of funds serviced. For more information on how Preqin s hedge fund online services can help you, please visit: www.preqin.com/hedge New York: One Grand Central Place 60 E 42nd Street, Suite 630, New York NY 10165 Tel: +1 212 350 0100 Fax: +1 440 445 9595 London: 3rd Floor Vintners Place 68 Upper Thames Street London EC4V 3BJ Tel: +44 (0)20 3207 0200 Fax: +44 (0)87 0330 5892 Singapore: One Finlayson Green, #11-02 Singapore 049246 Tel: +65 6305 2200 Fax: +65 6491 5365 San Francisco: One Embarcadero Center Suite 2850 San Francisco CA 94111 Tel: +1 415 316 0580 Fax: +1 440 445 9595 Hong Kong: Level 9, Central Building 1-3 Pedder Street Central, Hong Kong Tel: +852 3958 2819 Fax: +852 3975 2800 Manila: Pascor Drive Sto. Niño Parañaque City Metro Manila 1700 Philippines Email: info@preqin.com Web: www.preqin.com 2015 Preqin Ltd. / www.preqin.com